Builders might build more affordable homes
And Wall Street hates it.
US housing is not so much a market as it is a predicament.
The issues are well known. Supply is incredibly low. Prices are incredibly high. Mortgage rates above 6% mean the market is largely unaffordable to most Americans.
Just-released data on home prices showed they hit yet another record high in August.
As a result, home sales have been in free fall for the better part of three years, with transactions hitting levels previously seen only during the worst of the US housing bust that hit nearly 20 years ago.
This state of affairs isn’t working well. Even those supposedly best positioned to benefit from high prices, like homebuilders, still have to sell the homes to earn the profits.
Case in point: Home builder DR Horton, the largest US homebuilder by number of homes closed, which issued earnings on Tuesday. Profits and sales both tumbled compared to last year and well undershot Wall Street forecasts.
The reason? Fewer sales.
“We believe that rate volatility and uncertainty are causing some buyers to stay on the sidelines in the near term,” David Auld, the company’s executive chairman, said in a prepared statement. “To help spur demand and address affordability, we are continuing to use incentives such as mortgage-rate buydowns, and we have continued to start and sell more of our homes with smaller floor plans.”
Looking to next year, the company offered forecasts on home deliveries and revenue that were both below expectations.
Wall Street hated hearing that. Smaller homes logically translate into smaller sales and profits. And increased incentives — another way of lowering costs for home buyers — cut into margins.
As a result, in early trading, DR Horton shares were on their way to their worst drop since the pandemic hit in 2020. Fellow builders PulteGroup, Lennar, and NVR went along for the ride.
But investor pain could be buyers gain, if it means builders are recognizing reality and focusing on building affordable homes. On the other hand, with a market reaction like this, it would take a brave CEO to announce that strategy.